Confidential information v trade secrets

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Richard Baker Harrison Ltd v Brooks and others – [2021] All ER (D) 94 (Oct) offered the opportunity for a further exploration of the new legal relationship between trade secrets and confidential information, yet ultimately the case demonstrates how the legal community remains comfortable addressing trade secrets through the prism of confidentiality.

Richard Baker Harrison Limited (“RBH”) is a leading distributor of minerals and chemical raw materials which it supplies to manufacturers worldwide. Whilst not in itself a manufacturer it occupies a key position within the plastic, rubber, coating, adhesive and sealant, composite, ceramic and polishing sectors. In this case RBH sought to enforce obligations of non-competition, confidentiality, and post-termination restrictions against two former employees – Mr Brooks and Mr Sambrook – who had left RHB to establish SBS Sourcing Limited (a mineral sourcing and supply services business).

It was not in dispute that Brooks and Sambrook owed express obligations to protect RBH’s confidential information under their contract of employment but both defendants accepted that their contracts of employment also included the implied term of good faith and fidelity. Deputy High Court Judge Margaret Obi noted, “[T]his abstract concept includes an obligation to refrain from conduct which would be regarded as unacceptable by reasonable and honest people. In essence, it is no more than an obligation to loyally carry out the role of an employee. However, unlike a fiduciary duty, it does not require the employee to act solely in the interests of the employer … and mere preparations to set up a competing business after the termination of the employment are not necessarily a breach of contract.”

Mr Brooks admitted that he was under a duty, whilst employed, to maintain the confidentiality of RBH’s trade secrets and/or confidential information, and not to use any information obtained in confidence as a consequence of his employment to the detriment of RBH. However, he denied that there were any equitable duties in relation to trade secrets and/or confidential information that were not covered by the express terms or applicable implied terms of the contract. Accepting this submission Judge Obi denied the existence of any equitable duty relating to misuse of trade secrets.

Finding it to be “trite law that during the currency of the employment relationship the employer is entitled to protect confidential information whether it amounts to a trade secret or not”, Judge Obi was satisfied that RBH’s “customer/supplier connections, the stability of its workforce and the protection of its confidential information are all legitimate business interests requiring protection”.

PROTECTING YOUR MARITIME TRADE SECRETS & COMMERCIAL REPUTATION

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Salt Ship Design AS v Prysmian Powerlink SRL [2021] EWHC 2633 is the latest case to offer us a valuable insight into the operation of the Trade Secrets (Enforcement etc.) Regulations 2018 [TSR]. Heard before Justice Jacobs in the Queen’s Bench Division (Commercial Court) the case concerns the design of a Cable Laying Vessel to become named The Leonardo Da Vinci – a specialist vessel used to lay undersea cable for power transmission, telecommunications etc. – owned by the Prysmian Group.

In 2017 Prysmian held a competitive tender process to appoint a designer for the new vessel, which was won by Salt (an independent Norwegian ship design company), who were appointed as the “exclusive designer” for the Project under a Short Form Agreement (SFA) dated 13th July 2017.

In due course it was the Vard Group AS (part of the Fincantieri Group) which entered into a ship building contract for the vessel with Prysmian in April 2018, from which point Salt played no effective further part in the design of the vessel, as Vard Group AS used a wholly owned subsidiary, Vard Design AS, for future design work (despite Vard Design AS having been an unsuccessful competitor to Salt in the 2017 tender process).

Salt brought legal proceedings against Prysmian on two grounds, breach of contract and misuse of confidential information and it is the latter which is now our focus.

Jacob J notes Salt’s case is Prysmian (together with the Vard group of companies) wrongly used Salt’s confidential information to develop an alternative design for the vessel. Salt relies upon the speed at which Vard purported to develop an alternative design for the vessel between 21st December 2017 and 3rd January 2018, and described this at trial as “the Christmas miracle”. Salt also relies upon what it alleges to be striking similarities between aspects of this alternative design and Salt’s. It is therefore alleged that Salt’s design work was wrongly used as a springboard, with Vard piggy-backing on it, and being encouraged to do so by Prysmian, so as to win the design work and cut out Salt. [8]

Salt sought a determination of the applicability of TSR, relying upon these Regulations for remedial purposes, specifically the appropriate dissemination and publication of the judgement at Prysmian’s expense, given the “allegedly damaging effects of Prysmian’s conduct on Salt’s reputation in the market.” [448]

Referring to relevant case law Jacob J concluded that Prysmian had acted in breach of both clause 6.4 of the SFA and its equitable obligations of confidence. In so doing he felt entirely satisfied that the requirements of Regulations 2 & 3 of TSR had been fully satisfied. [474-475]

Whereas Regulation 14 of TSR provided for injunctive or similar relief for Salt, Regulation 16 provides for compensation instead of an order under Regulation 14, as follows:

“(1) A person liable to the imposition of an order under regulation 14 may apply for, and a court may make, an order for compensation to be paid to the injured party instead of an order under regulation 14 – a) if at the time of use or disclosure the person neither knew nor ought, under the circumstances, to have known that the trade secret was obtained from another person who was using or disclosing the trade secret unlawfully,

b) if the execution of the measures in question would cause disproportionate harm to the person liable to the measures, and

c) if it appears reasonably satisfactory to pay compensation to the injured party.”

Prysmian submitted that compensation should not be available under Regulation 16, because any infringement was not made with the knowledge that unlawful acquisition, use or disclosure of a trade secret was being engaged in. Nor ought it to have known that it was, given the assurances it had received from Vard, a well-respected and reputable shipbuilder. This argument was, however, rejected on the facts by Jacob J. who regarded this, “as a bad case of breach of confidence…Prysmian did engage in blatant misuse of confidential information to facilitate an outcome where it could obtain a ship built by Vard with the benefit of the Salt design, but at a significantly lower cost.” [470]

Prysmian went on to advance two further arguments to Jacob J in relation to TSR:-

“First, it contended that they do not apply outside the UK, [because] all the alleged infringements took place in Norway, Italy and/or Singapore. Salt submitted, and I agree, that that the Regulations apply in the present case because Prysmian is subject to the in personam jurisdiction of this court and English law is the applicable law for the claims made.

Secondly, Prysmian contended that the regulations only came into force on 9th June 2019, after Vard’s design work … and… the conclusion of the shipbuilding contract. I agree with Salt that this is irrelevant. Regulation 19 provides that they apply to proceedings brought before a court after the coming into force of the Regulations, in respect of a claim for unlawful acquisition use or disclosure of a trade secret. In the present case, the claim form was issued on 12th July 2018 and the relevant temporal requirement is met.” [480 & 481]

DAMAGE LIMITATION: TAKING BACK CONTROL OF IP DAMAGES POST BREXIT

By Jane Foulser McFarlane

The civil enforcement of intellectual property (IP) rights, was altered fundamentally when the Civil Enforcement Directive 2004/48/EC or IPRED, came into force. It was implemented to address the disparities between EU Member States for the enforcement of IP rights. The objective was to approximate legislative systems, so as to ensure a high equivalent and homogenous level of protection in the internal market. The Directive contains detailed obligations concerning final sanctions, preliminary measures and the disclosure and preservation of evidence, but the greatest effect upon UK IP law has been in relation to awards of damages and injunctive relief. However, since the UK exited the EU, with Brexit finally taking effect on 31 December 2020, it is wrong to assume that the remedies of the Enforcement Directive may no longer apply, as the civil enforcement regime for IP is now contained within the Post Brexit Trade and Co-operation Agreement (TCA), a 1246 page document, with the IP provisions set out at Title V and which came into effect on 1 January 2021, although the general principles of EU law now no longer apply to the UK, with EU regulations only continuing to apply in domestic law by virtue of the European Union (Withdrawal) Act 2018, which repealed the European Communities Act 1972, to the extent that they are not modified or revoked by regulations under that Act.

The object of Brexit was to ‘Take Back Control’, but the UK will still have to comply with some aspects of the EU aquis communautaire, since every EU Free Trade Agreement with other non EU countries, such as Australia or New Zealand, has a detailed IP Chapter and these countries are bound by bi-lateral agreements with the EU.If the UK wants to take back control of its IP laws it should redraft the Copyright, Designs and Patents Act 1988 (CDPA 1988). Brexit has made the need for a new Act more pressing, not less so.

Under the CDPA 1988, damages are awarded for infringement under section 97(2). There is no provision for an award of damages under section 97(1) where the infringer did not know and had no reason to believe, that copyright subsisted in the work to which the infringement action relates. However, without prejudice to any other remedy, section 97(2) allows the court to make an award of additional damages, after having regard to all the circumstances and in particular, to the flagrancy of the infringement and any benefit accruing to the defendant by reason of the infringement, thereby creating an implied punitive, or at least deterrent basis for a further award. Section 97 was not the most lucid legislative provision prior to 2004 and it was further complicated by the application of Article 13(1) of the Enforcement Directive. Under Article 13(1), the IP right holder can apply to the court for damages against an infringer who has the requisite knowledge that they were engaging in an infringing activity. The basis for such awards are compensatory, in that the damages must be appropriate to the actual prejudice suffered as a result of the infringing activity.

Under Article 13(1), the court has two alternative options for assessing the level of damages where the requisite knowledge is present. The first alternative under Article 13(1)(a), directs the court to take into account, all appropriate aspects, which include the negative economic consequences, including lost profits, which the right holder has suffered, unfair profits made by the infringer and, in appropriate cases, elements other than economic factors, such as moral prejudice. The second alternative under Article 13(1)(b), allows the court, in appropriate cases, to set the damages as a lump sum on the basis of elements such as, at least the amount of royalties or fees which would have been due if the infringer had requested authorisation to use the IP right in question. Where the infringer did not have the requisite knowledge, Article 13(2) gives the court the discretion to order the recovery of profits or the payment of damages which may be pre-established. Recital 26 of the Directive expands on Article 13, by stating that the aim is not to introduce an obligation to provide for punitive damages, but to allow compensation based upon an objective criterion, while taking account of the expenses incurred by the right holder, such as the cost of identification and research. 

Section 97(1) of the CDPA 1988 does not explicitly refer to the compensatory principle where damages can be awarded for infringement with knowledge, although like Article 13, the court may order damages which are arguably implicitly punitive in nature, even though there is an absence of requisite knowledge. The courts are now grappling with the contrasting provisions of section 97 and Article 13, when there is a recognised need to compensate the right holder based upon the infringer’s lack of respect for the law and also as a dissuasion to the infringer in question, as well as to other potential infringers, to prevent them from committing such acts of infringement in the future.

Several cases have illustrated the interpretation and interplay between section 97 and Article 13. The first case is Absolute Lofts South West London Limited v Artisan Home Improvements Limited, [2015] EWHC 2608 (IPEC), a case in which the dispute was about the quantum of damages for the defendant’s infringement of the Claimant’s copyright in 21 photographs of loft conversions undertaken by Absolute in the course of their business as providers of home improvements. There was no dispute that Artisan had used the photographs on their website, infringing the copyright held by Absolute. The issue for the court was the level of compensatory damages due to Absolute and whether they were also entitled to additional damages in accordance with section 97(2) of the CDPA 1988, the level of those damages, or whether the Absolute was entitled to a claim under Article 13 of the Enforcement Directive.

The parties had agreed the ‘user principle’ for the basis of calculating the compensatory damages, being the licence fee of £300.00 that Artisan subsequently paid for the use of the photographs. The court, with Hacon J sitting, went on to determine the issue of additional damages, which creates difficulties, as both regimes, under section 97(2) and Article 13 fall to be considered. Section 97(2) requires the court to assess whether the infringement is flagrant and the Article 13 criteria for assessment is the right holders lost profits, the infringer’s unfair profits and any moral prejudice caused to the right holder. The court accepted that the Director of Artisan had the requisite knowledge for the infringement and found that his ‘couldn’t care less’ attitude was sufficient to merit an award under section 97(2). However, the court’s conundrum did not end there, as Hacon J had to assess whether in fact, section 97(2) still applied, or whether Article 13 took precedence. In doing so, he referred back to his own decision in the case of Jodie Aysha Henderson v All Around the World Recordings Limited [2014] EWHC 3087 (IPEC), a case involving performers rights and liability for additional damages under section 191J(2) of the CDPA 1988 which is equivalent in all material respects to section 97(2). In that case, Hacon J had questioned whether the CDPA 1988 provisions continued to apply, but he had not been required to decide the point, whereas in Absolute v Artisan, the continuing applicability of section 97(2) was unambiguously in issue and had to be determined.

The complexity required in the court’s assessment of this issue cannot be understated and can only be briefly summarised here. Regulation 3(3) of the UK Intellectual Property (Enforcement etc) Regulations 2006, provide that this Regulation does not affect the operation of any enactment or rule of law relating to remedies for the infringement of intellectual property rights except to the extent that it is inconsistent with its provisions. The court found that this suggested that existing national law with regard to knowing infringement is preserved unless it is inconsistent with Regulation 3. Hacon J dismissed the proposition that either national law is consistent with Regulation 3 of the 2006 Regulations and therefore must be taken to have the same effect as Article 13(1) of the Directive and so to apply it in parallel is pointless, or it is contrary to the Regulations and should not be applied, with the implication that any national provision that falls short or goes beyond the relief contained within the Directive, is contrary to EU law. The court found that Article 2(1) of the Enforcement Directive preserves national legislation that provides for more favourable remedies than the Directive, which went no further than setting out a minimum level of EU wide remedies, it remained the position that a successful right holder can rely on either section 97(2) or Article 13(1), whichever provides the higher level of damages.

The court considered the distinction between punitive and compensatory damages, as English law is compensatory in nature, putting the Claimant back into the position they would have been in, but for the wrongful act. However, it was held that it would be wrong to limit the award of damages to a purely compensatory level under Article 13(1), as that provision allows the concept of unfair profits to be awarded. These can be indirect, as well as direct. In the case of Absolute and Artisan, Artisan suffered reduced profits leading to liquidation after it was forced to remove the infringing photographs from its website. The court implied that the company may have been liquidated sooner had it not relied upon the photographs and to that extent they had profited from the infringement on the back of Absolute’s intellectual creativity, whilst Absolute had not lost profits in the true sense. The strictly compensatory award of £300.00 would therefore lack the dissuasive element required by Article 3(2) of the Enforcement Directive and an award of £6,000 was made. A second assessment based on flagrancy was then made under section 97(2) and the same figure of £6,000 was awarded, but not on a cumulative basis, the total award being £6,300.

Hacon J revisited the the relationship between section 97(2) and Article 13 again, in the case of Phonographic Performance Limited v Raymond Hagan [2016] EWHC 3076 (IPEC) (PPL v Hagan). PPL brought a claim against Hagan for additional damages under section 97(2) to include a claim for unfair profits under Article 13(1), the issue of compensation having been dealt with at an earlier hearing. Both provisions require requisite knowledge, but whilst this is explicit under Article 13(1), it is not under section 97(2), where the court has to take flagrancy into account, which implied knowledge. Hacon J considered that it would be difficult to imagine circumstances in which additional damages would be appropriate without that knowledge. This case made the important point, in that it identified as an important factor, the extent to which an award of damages is likely to be dissuasive, the dissuasive element being to deter the infringer from infringing again and that other, potential infringers should be dissuaded from engaging in infringing activities.

It would have been reasonable to assume, having considered the inherent complexities involved when the courts award damages for IP infringement and the stated need to dissuade infringement, that greater consideration would have been given to the IP provisions of the TCA. IP Article 47 of that Agreement is materially the same as Article 13 and the UK has failed to take back control of its ability to determine how damages for IP infringement shall be awarded, with both regimes still  requiring consideration and assessment.

The time has now come, when the CDPA 1988 is torn up and placed in the legislative shredder and the remedies for IP infringement are clarified and simplified. For example, there should be two elements to an award of damages, with compensation determined first and a dissuasive element second. The requisite knowledge and issues such as flagrancy and unfair profits should go to the assessment of the level of the award and any new legislation should reflect the basis of Article 13 or Article IP 47 of the TCA in the new Act, thereby negating the need to balance one provision against the other, as the courts are currently having to do. Only then, will we go some way to taking back control of our IP and exercise some damage limitation.

Jane Foulser McFarlane ©
September 2021

Breach of the new Trade Secret law strengthens a claim to the application of the Rome II Convention

In his latest judgement in Fetch.ai v Persons Unknown & Others [2021] EWHC 2254 (Comm) His Honour Judge Pelling QC makes clear that not all claims in equity under Breach of Confidence will fall within the scope of the Rome II Convention, “[S]ome will where they involve unfair competition and acts restricting free competition, but many others will not.”[para.12]

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The case relates to confidential information in the form of an access key code, allowing an operator to trade in assets nominally credited to a cryptocurrencies Exchange Account. This confidential information had been acquired by persons unknown and used to perpetrate alleged fraud against the account holder, generating losses in excess of $2.6m.

It was contended that the decision of the Court of Appeal in Shenzhen Senior Technology Material Company Limited v Celgard, LLC [2020] EWCA (Civ) 1293; [2021] FSR 1 would lead one to the conclusion that all breach of confidence actions come within the scope of Rome II, Chapter II, Article 4.1., because the principles in Article 6 apply. Judge Pelling noted, however, what Article 6 is concerned with is anti-competitive practices and anti-competitive conduct, “Celgard had sought to restrain the defendant from placing its rival lithium-ion battery separators on the market in the UK or importing them into the UK on the basis that the defendant had obtained access to the claimant’s intellectual property in relation to its product; and, thus, what the defendant in that case was seeking to do was not merely a breach of confidence in equity, but was also contrary to reg.3.1 of The Trade Secrets (Enforcement, etc) Regulations 2018.” [para.11]

Applying the Rome II Convention in this instance allowed Judge Pelling to provide injunctive relief and various orders for disclosure in favour of the account holder.

Tinker, tailor, online spy

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Corporate/industrial espionage has been a fact of business life since time immemorial, but as Adam Bernstein notes in his latest article for The Company Secretary’s Review ,”It’s just that modern technology has made the process so much simpler…[and]…firms that don’t understand what’s at risk are playing with fire.”

By its very nature corporate/industrial espionage, along with corporate spying, can be hard to define but typically involves the illegal or unethical use of trade secrets to achieve commercial advantage. Be it hard or otherwise to define cyber espionage is with us and an ever-growing threat. Ian Bremmer of Time Magazine has recently warned, “Among the world’s most powerful countries, each government knows that an attack on the critical infrastructure of another invites retaliation…[which is]…why most of the action in cyberspace among cyber sophisticated nations is focused on stealing secrets and intellectual property.”

In addition to attacks on intellectual property, corporate/industrial espionage targets more general aspects of online activity. Unethical reviews, be they fake negative reviews about a rivals products or fake positive reviews to establish an undeserved market position, are an obvious example. Less obvious would be utilising negative search engine optimisation (SEO) tactics to impact adversely on a competitors search engine rankings, the illegality of which is open to question. Indeed, firms looking to protect themselves by countering such threats can, without prior recourse to professional advice, make matters worse for themselves by inadvertently generating even more adverse negative publicity.

In summary Bernstein concludes,”Competition is natural, but all firms of all sizes need to be on their guard for abuse. They shouldn’t be misled into thinking that espionage is all highbrow and involves spying that 007 would be proud of…”. The world of spying today has a much more anonymous face.

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IM-MEDIATE NOT LITIGATE

The use of ADR to resolve intellectual property (IP) conflicts is a subject that “lies at the intersection of two rapidly growing branches of law.” IP comprises exclusive rights to novel ideas as contained in tangible products of cognitive effort, which, due to its complexity and need for expert evidence, creates a lengthy and expensive litigation process. Mediation has the potential to offer an inexpensive, faster and more user friendly solution for the protection of IP rights and also for the defence against claims that can be brought or threatened by larger corporations against SME’s or individuals, by way of intimidation due to the threat of extensive legal costs and it should be mandatory.

The evolution of the Intellectual Property Enterprise Court (IPEC) in london, has gone some way to reducing the burden of IP litigation, since its inception. The court is run by a specialist IP judiciary, who manage the cases, so that discovery and the use of expert evidence is kept to a minimum. There are three case Tracks, the Multi-Track (MT) for cases with a value in excess of £50,000, a Fast Track (FT) for cases valued between £25,000 and £50,000 and a Small Claims Track (SCT), for cases worth £10,000 and £25,000. Damages and costs are capped. The SCT in particular, is of particular benefit to holders of IP rights that are valuable to the holder, but which do not have extensive commercial value, as there are fixed costs of £260 and IP owner can conduct the case as a litigant in person. The IPEC also sits on circuit in a number of court centres around the country, where the specialist judges hear these cases. The weakness in the SCT is that injunctive relief is not yet available, unlike in the MT and FT. This undermines the benefit of these reforms to IP litigation, as the Claimant in an IP case is more often seeking an injunction than an award of damages, the object being to bring the infringing act to a conclusion.

An alternative way to bring a swift end to infringing activity is to mediate. In a global world where the markets are chasing ‘The Next Best Thing’ most businesses cannot afford to litigate, either time wise or cost wise. Once a product is successful in getting to market, other creators are looking to cash in on that success by creating something newer and better. IP must be enforced in an efficient, effective and proportionate way. When a report to evaluate the IPEC was published in June 2015, all respondents stated that litigation was typically a last resort, but there were a number of negative comments on the usefulness of ADR/mediation and the Report did not find strong support for expanding its role. There was however, a view that the Allocation Questionnaire could be redesigned to force parties to take further steps to convince the court that they had engaged in settlement or mediation negotiations before commencing litigation. This is insufficient and shortsighted and contrary to the findings of the 2006 Gower’s Review which focused on the use of alternative methods of dispute resolution, which not only provide a low cost alternative to litigation but could help to avoid the negative aspects of conflict, such as damage to reputation, lost customers, damage to company morale, as well as the large costs implications.

At the date of the Gower’s Review, the cost of mediating was £3,000 with a high proportion of cases, 70%, referred to mediation, going on to reach settlement. The World Intellectual Property Organisation (WIPO) established the WIPO Arbitration and Mediation Centre in 1994 on a not for profit basis. This has been recognised as an international and neutral forum and the Centre also works as a resource centre to raise awareness of the valuable role that ADR can play in different sectors. As the Gower’s review pointed out, mediation and other ADR methods are currently poorly used and understood for IP. The old Department for Constitutional Affairs (DCA) promoted the use of ADR for years, but some judges were reluctant to encourage parties to mediate and large companies were also reluctant to engage, in case they were perceived as being weak. The Gower’s Review recommended strengthening the Practice Directions to provide greater encouragement for parties to mediate, which would raise the profile of mediation with the judiciary. The Review hesitated to impose further incentives to mediate, such as mandatory mediation as individuals have a right of access to the courts under Article 6 of the Human Rights Act 1998. This view does not bear scrutiny because mediation does not prevent access to the court system, it is an alternative method or resolution or an early step in the overall litigation process.

A working example can be found in the Philippines, where the Intellectual Property Office (IPOPHL) has taken steps to establish a strong and balanced IP regime that is conducive to business and industry. One of the challenges to the enforcement of IPR’s in the Philippines was the speedy disposal of cases and to address that concern, a number of reforms were introduced and implemented. One of these reforms was the introduction of the mandatory referral of IP cases for mediation. Once a case had been filed in the Originating Office, it was referred to ADR Services and the parties can choose between IPOPHL or WIPO mediation. Amongst the Best Practices in Mediation identified by the IPOPHL, was the mandatory referral for mediation, which gives the parties an opportunity to explore their own option for settlement without necessarily limiting their position in the litigation process. There is also the benefit that as the mediation is mandatory, parties such as large corporations will not see themselves as being weak by participating in it, as they have no choice.

Mediation has been described as the ‘sleeping giant of IP disputes’ and in the US, its use in patent disputes has been lauded. In addition to the many benefits that ADR provides to the parties, judges are seriously looking for new ways to reduce their caseloads and are turning to ADR to assist with case management, as referring a case to ADR means that between 60 to 80% of the time, the case will settle, thereby relieving the judges caseload. In the UK, the use of mandatory mediation may be the best method of early case management for IP judges, who then have the benefit of taking the case once the issues have been narrowed down, prior to the pleading stage. The Gower’s Review and subsequently, the Hargreaves Review in 2011 both missed a valuable opportunity to encourage this scheme in the UK.

Whilst the IPEC may be less overburdened than other sections of the legal system after the Covid 19 lockdowns, there will undoubtedly be a backlog of cases. On a positive note, the use of remote hearings has proliferated in the last 18 months and this cannot be underestimated in the overall reduction of costs. The UK Intellectual Property Office (IPO) which has long offered a mediation service, now offers that service online. The IPO website sets out details of the service, but the cost of mediation is about £250 per person for an eight hour mediation session, with the price reduced accordingly for shorter sessions. This compares to just over £400 per person plus room hire, for the same period of time.

The IPO mediation service represents a particularly cost effective way for individuals and SME’s in particular, to settle IP disputes with the assistance of an experienced IP mediator. The IPO has the independence, expertise and resources to provide mediation in a cost effective way, if the Government were to make it mandatory. This would reduce the burden on the IPEC and the judiciary and ensure that IP right holders could obtain maximum benefit from their IP. There is no detriment to the parties from engaging in this process and there is everything to gain. There will still be cases that proceed to litigation, but early independent intervention has the potential to take the heat out the situation and identify what exactly the parties are hoping to achieve, whether that is injunctive relief or a financial settlement.

JANE FOULSER MCFARLANE © 2021

UK IPO invites IP Wales to explain new trade secrets law for SMEs

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Shh! The importance of keeping your trade secrets, secret
We receive many customer queries on patents, trade marks, copyright and designs, but we find less is known about trade secrets. We asked Andrew Beale OBE of IP Wales, an award-winning SME business support initiative, to explain what a trade secret is, how it applies to businesses and how it can be protected.” (UK IPO Blog 5th July 2021)

IP Wales is indebted to the UK Intellectual Property Office for this invitation, as an “industry expert from the world of IP”, to explain on its blog for its readers these important matters.

The introduction into UK law of the Trade Secrets (Enforcement etc.) Regulations 2018 has proved a useful reminder to all firms, whatever their size, that trade secrets can be a valuable business asset.

Questions addressed for businesses during the course of the article include:-

How do I recognise my trade secrets?

What constitutes the “reasonable steps” now demanded of business in order to protect their trade secrets?

How does a business legally preserve its trade secrets?

Why is it important to educate and train staff about trade secrets?

How does my business risk manage its cybersecurity?

The online threat to trade secrets during the current pandemic has never been greater, which is why IP Wales has developed free guidance to help SMEs better manage their IP cybersecurity (see www.ipcybersecurity.com).

The preservation of commercially sensitive information during litigation

(Image by 726056 by pixabay)

Issues of confidentiality often arise in litigation under procurement challenges, as illustrated in the recent case of Bechtel v High Speed Two (HS2) [2021] EWHC 458.

In this case Mr Justice Fraser noted, “[I]n my judgment, the level of profit in percentage terms that a tenderer included in its bid in this procurement competition is properly described as commercially confidential, and is also something that any tenderer, whether a claimant in proceedings or otherwise, would wish to keep confidential for justifiable reasons.”[35]

In terms of how to retain the confidentiality of such information during litigation, it is contrary to open justice and transparency to have trials conducted (even partially) in secret for all but those legal representatives who sit within a court’s prescribed ‘confidentiality ring’.

At the same time judgements need to be readily comprehensible and include reference to all relevant material and reasoning of the the judge, so having a separate confidential appendix or schedule in a judgement should only occur when there is no viable alternative.

In the circumstances of the present case Mr Justice Fraser concluded there was no viable alternative available to him, for without such a confidential appendix to his judgement (available only to those within the ‘confidentiality ring’), he “would run the real risk of destroying justified confidentiality in commercial issues.”[34]

Understanding TSR and its “curious provision”

Lord Justice Arnold

Giving judgement in the Court of Appeal case Shenzhen Senior Technology Material Co Ltd v Celgard, LLC [2020] EWCA Civ 1293 Lord Justice Arnold has shone a further light on the UK Trade Secrets (Enforcement, etc.) Regulations 2018 (SI 2018/597) [TSR].

Dividing his analysis into pre/post the EU Trade Secrets Directive (EU Dir. 2016/943) Arnold LJ noted, “under English law prior to the implementation of the Trade Secrets Directive, trade secrets constituted a particular category of confidential information. The principal distinguishing characteristic of trade secrets, as opposed to other forms of confidential information, was that a former employee could be restrained from using or disclosing their former employer’s trade secrets after the termination of the employment”. [24]

“The Trade Secrets Directive harmonises the protection against the unlawful acquisition, use and disclosure of trade secrets in the European Union. It is not an exhaustive harmonisation: Article 1(1) provides that Member States may provide for more far-reaching protection than that required by the Directive provided that compliance with a number of provisions of the Directive is ensured. Thus the Directive provides both a floor and a ceiling.”[25]

Moreover, it was noted that whilst TSR might implement the Trade Secrets Directive, it does not transpose Articles 3, 4 or 5 of the Directive.

Turning to the “curious provision” of Regulation 3 Wider Protection, Arnold LJ surmised “… it appears to be primarily intended to ensure that, if and in so far as English law prior to the implementation of the Trade Secrets Directive was more favourable to the trade secret holder…then that greater level of protection shall continue to be available…”.[29]

Conversely it was noted that Regulation 3 does not appear to address the position if the Directive confers greater protection than English law did previously. In such a situation the solution advocated by Arnold LJ would be to interpret and apply TSR consistently with the Directive and again offer the trade secret holder the higher protection.

Despite its somewhat inauspicious start at IPEC it seems clear that our Judges are starting to get to grips with TSR.

Inauspicious start for the UK Trade Secrets Regulations at IPEC

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Trailfinders v Travel Counsellors [2020] EWHC 591 (IPEC) represented the first opportunity for judicial scrutiny of the UK Trade Secrets (Enforcement, etc.) Regulations 2018 (SI 2018/597).

The approach adopted by HH Judge Hacon was provisions of the EU Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (EU Dir. 2016/943), especially Chapter II and Articles 6, 7 and 16, had already been implemented – without the need for these Regulations – into our law under common law and equity. Hacon J accordingly, “assumed that the substantive principles governing the protection of confidential information under English law, including that afforded by terms implied into contracts of employment and by equitable obligations of confidence, are unaffected by the Directive. However, the Directive shines an occasional light on those principles.[para.9]

In particular, Hacon J found,”the best guide to the distinction between information which is confidential and that which is not is now to be found in the definition of ‘trade secret’ in Article 2(1) of the Directive 2016/943.[para.29]

This would imply that the established three stage common law test for confidentiality of: (1) the information itself must have the necessary quality of confidence; (2) the information must have been imparted in circumstances importing an obligation of confidence (either expressly, or which ought reasonably to have been understood by the recipient) and; (3) there must be an unauthorised use of that information to the detriment of the rights holder; now needs to be updated in line with the new statutory definition of a ‘trade secret’ being information which: (1) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among, or readily accessible to, persons within the circles that normally deal with the kind of information in question; (2) has commercial value because it is secret, and; (3) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

However, the difficulties inherent within this interplay between the new statutory definition of a ‘trade secret’ and the old common principles of confidentiality can be illustrated by Hacon J’s legal treatment of the two terms, ‘secret’ and ‘reasonable steps’.

Secret

The preamble to the EU Trade Secrets Directive makes clear that its definition, “excludes trivial information and the experience and skills gained by employees in the normal course of their employment, and also excludes information which is generally known among, or is readily accessible to, persons within the circles that normally deal with the kind of information in question.” [para.14]

Mr La Gette and Mr Bishop as the defendants in this case had argued that Trailfinder’s information on clients’ names, nationalities, interests, contact details and past bookings was already in the public domain and was therefore ‘readily accessible’ to them. Trailfinders held this client information on two systems: Viewtrail was an online portal used to record booking details and Superfacts was a software system which recorded information about clients. Bishop had admitted using the Superfacts system to assemble, for about six months before he left Trailfinders, a ‘contact book’ about clients and both he and La Gette admitted accessing Viewtrail after they had left Trailfinders.

Hacon J took the view that the Trailfinder information had met the statutory threshold for being ‘secret’ but went further adding, “Lewison LJ observed in Force India Formula One Team Ltd v Aerolab Srl [2013] EWCA Civ 780; [2013] RPC 36 (with whom Briggs LJ and Sir Stanley Burton agreed): It is certainly not a defence [to an allegation of breach of confidence] that the person in breach of confidence could have obtained the information elsewhere if he did not in fact do so.(at [72]) [para.35]

Reasonable Steps

Wearing the ‘clean hands’ spectacles demanded of equity Hacon J felt able to find that although, “[T]he protection may not have been as rigorous as it should have been [but] Trailfinders clearly took steps to ensure that the Client Information was not openly available to anyone by requiring the use of a password or, in the case of Viewtrail, limiting access to information to clients only if their name and booking reference was known”. [para.73]

Image by Zach Dulli from Pixabay

This approach would appear to be at variance with that adopted by judicial counterparts in the USA, who, whilst not requiring of perfection, on the whole would take a dim view of any failure on the part of a holder of trade secrets not to identify and label confidential information as such, nor take any steps to restrict ex-employee online access. It is worthy of note that the origins for the broad definition for a ‘trade secret’ under the UK Regulations ultimately lies within American jurisprudence, where State and now Federal Courts have had decades of experience in its interpretation.

The issue may lay in the fact that Hacon J categorised the confidential information at play in this case as class 2 information acquired during the normal course of employment which remains in the employee’s head and becomes part of his own experience and skills (not class 3 information, namely specific ‘trade secrets’ requiring of a higher degree of confidentiality) – see Goulding J’s classification in Faccenda Chicken Ltd v Fowler [1985] 1 All ER 724, albeit the Court of Appeal ultimately differed with Goulding J’s analysis of where to draw the line between classes 2 and 3. This begs the unanswered question, would Hacon J have demanded more in the way of ‘reasonable steps’ from Trailfinders had he categorised the confidential information as class 3?

Given the EU Trade Secrets Directive does not replace English common law, the overall effect was said to be that a UK trade secret holder could apply for remedies under the common law of confidentiality either in addition, or as an alternative, to the remedies provided under the Trade Secrets Regulations (i.e. in instances where the English common law provided for ‘wider remedies’ – Regulation 3). It will be interesting to see in the future whether our more senior judicial brethren continue to follow Hacon J’s approach of an interplay between the two. But for the time being at least the new Trade Secrets Regulations, and Regulation 2 in particular, can (merely) be viewed as an aid to common law interpretation, illuminating what information now has ‘the necessary quality of confidence’ under both classes 2 and 3, as categorised in the Faccenda Chicken case.